Academies – common tax pitfalls, risks and opportunities

Despite this, academies must still comply with the various VAT and corporation tax compliance requirements that apply to charities generally. With the experience we have accumulated through working with over 100 academies, we have identified some regular tax pitfalls, risks, and opportunities in the sector that you should be aware of.

Non-educational activities

If an academy generates income from trading activities that are not strictly in line with its educational objects (e.g. facilities hire, secondment of staff, consultancy, sales) this income could potentially be subject to corporation tax. There are various exemptions available, including a small-scale trading threshold of £80,000 (currently), but many academies could be subject to corporation tax. 

Setting up a trading subsidiary company to carry out non-educational activities can protect an academy from commercial risk and also help to mitigate any inadvertent tax exposure. In all cases, the VAT treatment of these activities should be closely examined as they will count towards the VAT registration threshold where they are taxable. Consideration should also be given to forming a VAT group registration with the subsidiary to avoid multiple VAT registrations and remove VAT on any transactions between the academy and the subsidiary. 

Facilities hire

‘Pure’ lettings of indoor or outdoor spaces are usually exempt from corporation tax for academies. However, facilities hire such as astro-pitches, gyms, conference facilities and catering facilities may be subject to corporation tax. Lettings that fall in between, such as hire of classrooms with peripheral use of equipment, may also be at risk of exposure to tax. Suitable amendments to letting forms which restrict or separate the use of facilities, can help to reduce this exposure.  

For VAT purposes, such income will likely be exempt from VAT with the consequence that this could affect the academies VAT recovery position. However, it is worth considering exercising the option to tax making such services liable to VAT and thus giving entitlement to VAT recovery. 

Cause-related marketing/Sponsorship income

Where academies receive funding from corporate entities and in return display the sponsor’s name and logo on their website or sports kit, this attracts a VAT charge and may also be subject to direct tax. Careful restructuring of such arrangements can reduce the sum on which VAT might be due and the exposure to corporation tax. 

Government grants

Most grants from local authorities to academies are for strictly educational purposes and therefore exempt from corporation tax. However, sometimes the grants are made for other services such as family support or childcare facilities, which although intended for charitable purposes, could still fall outside of an academy’s objects and therefore outside of the charitable exemptions from tax. It is worth reviewing grant agreements carefully against the academy’s objects and taking action where the two are not clearly aligned. This is also important for VAT purposes as funding referred to as grant income can sometimes be considered for services provided. If such services are exempt, this could affect VAT recovery.

Trading subsidiaries 

Commercial activity is often delivered through a separate trading subsidiary, and consequently, profits chargeable to tax can be reduced by donating them to the academy trust or another charitable entity. Academies with trading subsidiaries should be aware that the subsidiary cannot legally donate to the academy without available accounting reserves to do so, otherwise it will be deemed to be a distribution under company law. Mismatches between accounting and taxable profit in the subsidiary can therefore expose the subsidiary to corporation tax. 

To help keep the accounting and taxable profits in line, academies should ensure that where possible, tax-disallowable costs such as capital costs, penalties and entertaining, are not incurred by the subsidiary. As set out above, consideration should be given to VAT Grouping. 

Self-employed contractors 

Academies often use contractors to provide teaching support, teaching of extracurricular subjects (such as peripatetic music teachers) and office support, among other services. An academy is always responsible for reviewing each arrangement to determine whether tax needs to be deducted under PAYE – it is not sufficient to have the contractor simply sign a declaration stating that they are responsible for their own taxes. 

HMRC regularly carry out payroll inspections and may seek to recover unpaid PAYE, plus penalties and interest from the academy, if they believe a worker has been treated incorrectly as self-employed. A careful review of each new contractor’s working arrangements can help to keep the academy’s employment tax position secure.  

Off-payroll workers

As of 6 April 2017, academies are responsible for assessing the employment status not only of individual contractors, but also those using intermediary companies which is a ‘deemed’ employment status known as IR35. 

Since 6 April 2017, the responsibility has been that of the entity employing the contractors, therefore academies should review the employment status of all new and existing off payroll workers. IR35 regulations detail the compliance requirements – more details can be found here.

VAT registration

An academy might make various business supplies that could be taxable for VAT purposes, such as facilities hire, catering for staff and governors, advertising, staff secondments, sale of sports equipment and sale of school uniforms. If the level of taxable supplies exceeds the VAT registration threshold (currently £90,000), the academy will be required to register for VAT. If it fails to register at the correct time, it will be liable for penalties as well as the VAT due on the supplies made. Monitoring the turnover from taxable supplies on a rolling monthly basis will ensure that any obligation to register for VAT is identified at the correct time.  

A Multi-Academy Trust (MAT) with only a few schools may find that it has breached the threshold for VAT registration with what could appear to be a small amount of taxable business supplies in each school. 

VAT 126 claims

Where academies are not VAT registered, they can recover the VAT incurred in relation to their non-business activities on form VAT 126. However, this form cannot be used to recover the VAT incurred on the business supplies they make. If an academy or MAT enters 100% of the VAT it incurs on form VAT 126 without carrying out any apportionment to reflect business activity, it will be over-claiming VAT and will be liable to potential interest and penalties in respect of the incorrect claim. VAT 126 claims should therefore be reviewed carefully.

Partial exemption

If an academy makes both taxable and exempt supplies, there will be an element of overhead VAT which relates to both supplies. The default position in such circumstances is to use the standard partial exemption method to calculate the extent of VAT recovery. This is not always the most fair and reasonable method and consideration should be given whether to apply for a special method. 

Capital Projects

Most building work will be standard rated, but there are specific zero rate reliefs for new buildings or charity annexes that are used solely for a relevant charitable purpose. Whilst in most instances academies should be able to reclaim VAT incurred on such projects, that will not always be the case and advice should be sought on the optimum structure, particularly as projects of this nature may involve potentially significant VAT costs. Professional fees will always be subject to VAT, but the use of a 'design and build' structure can be helpful in circumstances where VAT represents a cost.

Academies involved with such projects must also consider the application of the capital goods scheme.

Apprenticeship levy

Academies or MATs with payroll costs above £3 million are generally required to pay a 0.5% levy on their payroll. This levy can be used to fund apprenticeship training for the academy’s staff by setting up a levy account. 

Gift Aid

Academies are charities for tax purposes and are eligible to claim gift aid on qualifying donations from individuals, increasing their value by 25%. In order to make a claim, the academy will need to register with HMRC Charities and obtain a gift aid declaration from the donor. 

How we can help

We can advise on your academy’s exposure to the risk and the potential for opportunities to mitigate VAT and Tax where possible. For instance:

1. If your academy is recovering all of the VAT it incurs (including those relating to trading activities) and it is VAT registered, speak to your VAT advisers to confirm whether full recovery is correct 
2. If your academy generates income from non-education trading activities with a total value of £80,000 or more, speak to your tax adviser to minimise exposure to corporation tax  
3. If your academy supplies sports facilities to the local community in return for a fee, speak to your VAT advisers about the VAT implications 
4. If there is a capital project, consider the most efficient structure for both VAT and tax.

Buzzacott are experts at advising academies and MATs on all aspects of their tax and compliance needs. The services we provide include:

• A complete health check review of activities for corporation tax and VAT risks
• Advice on setting up and operating a trading subsidiary
• Support with VAT recovery and registration
• Advice on capital projects
• The implications of VAT group registration
• Consideration of partial exemption methods and representation to HMRC as required
• Advice on setting up and operating Gift Aid claims.